Jakarta – US ambassador Ralph Boyce has urged reform of Indonesia's "ineffective and corrupt" legal system to help attract badly needed foreign investment.

"Indonesia faces no more serious economic challenge today than fundamentally improving the environment for investment, both domestic and foreign," Boyce said in a speech Thursday. The text was released Friday by the US embassy.

Boyce praised several achievements by President Megawati Sukarnoputri's legal team but said there was little sign the investment climate was improving. "Indonesia's legal system is still ineffective and corrupt. More troubling still, Indonesian companies are learning that they can manipulate the courts to criminalise standard business disputes," he said.

"In the past few months, at least five American investors have been forced into court on charges that quite honestly would never hold up in a US court. "Each of these companies has shown a long-term commitment to Indonesia but still finds itself lost in a non-transparent legal maze."

Boyce said Indonesia's devolution program to give more powers to the regions had created additional uncertainties for investors.

The ambassador said investors realised that the government did not directly control the courts. "But they want to see clear and principled leadership on legal reform from the highest levels of the government. They want the government to demonstrate that it understands the gravity of the problem in its courts and is committed to resolving them."

In the first two months of this year the government approved 149 foreign direct investment projects worth 489.3 million dollars against 189 projects worth 2.33 billion a year earlier.

The Asian Development Bank, in its annual report released this month, said there was "a widespread perception that the policy environment for investment in Indonesia has turned harsh and unsupportive." Boyce did not identify the US companies facing legal problems.

A US district court has declared Indonesia's state energy giant Pertamina to be in contempt of court after it used a Jakarta court to contest a 261-million-dollar award against it by an international arbitration panel. The judgement, over a cancelled power plant project, was in favour of US-controlled power firm Karaha Bodas.